SHAW GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2002
----------------------------------------

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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Commission File Number: 0-22992
------------------------------------------------

THE SHAW GROUP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Louisiana 72-1106167
- --------------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)

4171 Essen Lane, Baton Rouge, Louisiana 70809
- --------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)

(225) 932-2500
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(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----- -----

The number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date, is as follows:

Common stock, no par value, 41,889,977 shares outstanding as of July 12, 2002.

FORM 10-Q

TABLE OF CONTENTS

Part I - Financial Information

Item 1. - Financial Statements

Condensed Consolidated Balance Sheets - May 31, 2002
and August 31, 2001 3 - 4

Condensed Consolidated Statements of Income - For the Three
Months and Nine Months Ended May 31, 2002 and 2001 5

Condensed Consolidated Statements of Cash Flows - For the Nine
Months Ended May 31, 2002 and 2001 6

Notes to Condensed Consolidated Financial Statements 7-19

Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 20-34

Item 3. - Quantitative and Qualitative Disclosures About Market Risk 35

Part II - Other Information

Item 2. - Changes in Securities 36

Item 4. - Submission of Matters to a Vote of Security Holders 36

Item 6. - Exhibits and Reports on Form 8-K 36-37

Signature Page 38

Exhibit Index 39

2

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

ASSETS

(Continued)

The accompanying notes are an integral part of these statements.

3

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)

LIABILITIES AND SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these statements.

4

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)

The accompanying notes are an integral part of these statements.

5

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

The accompanying notes are an integral part of these statements.

6

THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Unaudited Financial Information

The accompanying condensed consolidated financial statements and financial
information included herein have been prepared pursuant to the interim reporting
requirements of Form 10-Q. Consequently, certain information and note
disclosures normally included in financial statements prepared annually in
accordance with generally accepted accounting principles have been condensed or
omitted. Readers of this report should refer to the consolidated financial
statements and the notes thereto included in the Annual Report on Form 10-K for
the fiscal year ended August 31, 2001 of The Shaw Group Inc.

The financial information of The Shaw Group Inc. and its wholly-owned
subsidiaries (collectively, "the Company" or "Shaw") for the three-month and
nine-month periods ended May 31, 2002 and 2001 and as of May 31, 2002 and August
31, 2001 included herein is unaudited. However, the Company's management
believes it has made all adjustments (consisting of normal recurring
adjustments) which are necessary to fairly present the results of operations for
such periods. Results of operations for the interim periods are not necessarily
indicative of results of operations that will be realized for the fiscal year
ending August 31, 2002.

The Company's foreign subsidiaries maintain their accounting records in their
local currency (primarily British pounds, Australian and Canadian dollars,
Venezuelan Bolivars, the Euro, and prior to January 1, 2002, Dutch guilders).
All of the assets and liabilities of these subsidiaries (including long-term
assets, such as goodwill) are converted to U.S. dollars with the effect of the
foreign currency translation reflected in "accumulated other comprehensive
income (loss)," a component of shareholders' equity, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52 - "Foreign Currency
Translation" and SFAS No. 130 - "Reporting Comprehensive Income." Foreign
currency transaction gains or losses are credited or charged to income.

Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.

Note 2 - Treasury Stock Transactions

In September 2001, the Company announced that its Board of Directors had
authorized the Company to repurchase shares of its no par value common stock
("Common Stock"), depending on market conditions, up to a limit of $100,000,000.
As of July 10, 2002, the Company had purchased 1,111,400 shares at a cost of
approximately $27,131,000 under this program.

Additionally, in March 2002, 650 shares, valued at approximately $33,000, were
returned to the Company with respect to the finalization of the Scott, Sevin &
Schaffer, Inc. acquisition which was completed in March 2001.

Note 3 - Escrowed Cash for Performance Bond

In connection with a performance bond on a foreign project, the Company agreed
to deposit in escrow with the issuer of the bond primarily advance payments
received from the Company's customer. During the nine months ended May 31, 2002,
the Company deposited $96,500,000 into escrow pursuant to this agreement. This
deposit is recorded as escrowed cash. As a result of the performance bond, the
Company's customer agreed not to withhold retentions on the Company's billings.
The Company believes that based on current contract terms and scope, its initial
$96,500,000 deposit represents its maximum escrow requirement for the project.
The Company expects that the maximum balance will be retained in escrow until
early to mid calendar 2003, at which time escrow funds will

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be released to the Company as the Company completes certain contract milestones.
A final escrow amount of approximately $18,000,000 will be released to the
Company upon initial contract acceptance as defined in the agreement, which is
currently projected to occur in calendar 2005. The bonding company (or "surety")
may draw on the escrow funds only to secure the surety from a defined loss. The
escrowed funds are invested in short-term, high quality investments and
investment income is remitted to the Company on a quarterly basis. The Company
may request the surety to allow the Company to substitute a letter of credit for
all or part of the cash escrow requirements.

Note 4 - Acquisitions

SFAS No. 141 - "Business Combinations" (see Note 11 of Notes to Condensed
Consolidated Financial Statements) requires that all acquisitions initiated
after June 30, 2001 be recorded utilizing the purchase method of accounting.
Additionally, most of the Company's acquisitions that were completed prior to
June 30, 2001 were also accounted for under the purchase method of accounting.
Under the purchase method, the cost of each acquired operation is allocated to
the assets acquired and liabilities assumed based on their estimated fair
values. These estimates are revised during the allocation period as necessary
when, and if, information becomes available to further define and quantify the
value of the assets acquired and liabilities assumed. The allocation period
("allocation period") does not exceed beyond one year from the date of the
acquisition. To the extent additional information to refine the original
allocation becomes available during the allocation period, the allocation of the
purchase price is adjusted. Likewise, to the extent such information becomes
available after the allocation period, such items are included in the Company's
operating results in the period that the settlement occurs or information is
available to adjust the original allocation to a better estimate. These future
adjustments, if any, that may arise from these acquisitions may materially
favorably or unfavorably impact the Company's future consolidated financial
position or results of operations.

In connection with potential acquisitions, the Company incurs and capitalizes
certain transaction costs, which include legal, accounting, consulting and other
direct costs. When an acquisition is completed, these costs are capitalized as
part of the acquisition price. The Company routinely evaluates capitalized
transaction costs and expenses those costs related to acquisitions that are not
likely to occur. Indirect acquisition costs, such as salaries, corporate
overhead and other corporate services are expensed as incurred.

The operating results of the acquisitions accounted for as a purchase are
included in the Company's condensed consolidated financial statements from the
applicable date of the transaction.

IT Group Acquisition

During fiscal year 2002, the Company entered into a purchase agreement to
acquire substantially all of the operating assets of The IT Group, Inc. ("IT
Group") and its subsidiaries, including its wholly-owned subsidiary Beneco
Enterprises, Inc. ("Beneco"). IT Group and Beneco are referred to herein
collectively as "ITG." Both IT Group and Beneco are each subject to separate
Chapter 11 bankruptcy reorganization proceedings.

On May 3, 2002, the Company acquired substantially all of the operating assets
and assumed certain liabilities of the IT Group and its subsidiaries, excluding
Beneco. IT Group was a leading provider of diversified environmental consulting,
engineering, construction, remediation and facilities management services. The
primary reasons for the acquisition were to diversify and expand the Company's
revenue base into less cyclical industries and to pursue additional
opportunities in the environmental, infrastructure, and Homeland Defense
markets. The Company formed a new wholly-owned subsidiary, Shaw Environmental
and Infrastructure, Inc. ("Shaw E&I") into which it will combine the operations
of the acquired ITG businesses and the Company's existing environmental and
infrastructure operations.

8

The acquisition was completed as part of a Chapter 11 bankruptcy proceeding for
the IT Group. The purchase price included the following components: (i) cash of
approximately $40,400,000, net of approximately $12,100,000 cash received at
closing, (ii) 1,671,336 shares of Common Stock valued at approximately
$52,463,000, (iii) assumption by the Company of the outstanding balance
($50,000,000) debtor-in-possession financing provided to The IT Group by the
Company, (iv) transaction costs of approximately $10,000,000, and (v) the
Company's receipt of approximately $10,200,000 from a surety for the IT Group to
complete certain IT Group contracts which was reflected as a reduction of the
purchase price.

On June 15, 2002, the Company acquired substantially all of the assets
(approximately $32,000,000) and assumed certain liabilities (approximately
$17,000,000) of Beneco. Beneco was a wholly-owned subsidiary of the IT Group
whose primary business was facilities management for governmental and military
facilities. The Beneco acquisition was completed as part of a Chapter 11
bankruptcy proceeding, which is separate and independent of the IT Group's
bankruptcy proceeding. The Beneco purchase price includes (i) approximately
$650,000 in cash paid at closing, (ii) assumption by the Company of the
outstanding balance ($1,500,000) debtor-in-possession financing provided to
Beneco by the Company, (iii) transaction costs of approximately $1,500,000, and
(iv) receipt of $3,300,000 from a surety for the Company to complete certain
contracts, which will be reflected as a reduction of the purchase price. Because
the Beneco acquisition was completed after May 31, 2002, the Company's financial
statements as of May 31, 2002 do not include the acquired assets and assumed
liabilities, nor any operating results of Beneco. Upon inclusion of Beneco's
assets and liabilities in the aggregate purchase price allocation of ITG, the
Company believes its goodwill will be reduced by approximately $15,000,000.

In conjunction with the acquisitions of the IT Group and Beneco, the Company
entered into agreements with two surety companies. In exchange for the Company's
agreeing to complete certain of the ITG's bonded contracts (i) the sureties paid
the Company approximately $13,500,000 in cash, which was reflected as reductions
of the purchase price of IT Group and Beneco, and (ii) the sureties assigned to
the Company their rights to Debtor-in-Possession financing of approximately
$20,000,000 which the sureties had provided to Beneco. Of the $13,500,000 cash
received from the sureties, approximately $10,200,000 was allocated to the IT
Group purchase price and $3,300,000 to the Beneco purchase price.

The Company believes, pursuant to the terms of both the IT Group and the Beneco
acquisition agreements (collectively "the acquisition agreements"), that it has
assumed only certain liabilities ("assumed liabilities") of the IT Group and
Beneco as specified in the acquisition agreements. The Company has estimated
that its total of assumed liabilities are approximately $256,000,000. Further,
the acquisition agreements also provide that certain other liabilities of the IT
Group and Beneco, including but not limited to outstanding borrowings, leases,
contracts in progress, completed contracts, claims or litigation that relate to
acts or events occurring prior to the acquisition date, and certain employee
benefit obligations, are specifically excluded ("excluded liabilities") from the
Company's transactions. The Company, however, cannot provide assurance that it
does not have any exposure to the excluded liabilities because, among other
matters, the bankruptcy courts have not finalized their validation of the claims
filed with the courts. Additionally, the Company has not completed its review of
liabilities that have been submitted to the Company for payment. Accordingly,
the Company's estimate of the value of the assumed liabilities may change as a
result of the validation of the claims by the bankruptcy courts or other factors
which may be identified during its review/processing of liabilities.

The IT Group acquisition was recorded as a purchase, and accordingly, the
Company's results of operations include those of the acquired IT Group
businesses from the date of acquisition. The purchase price has been allocated
to the acquired assets and liabilities based on the estimated fair value as of
May 3, 2002, as set fourth in the table

9

below (in thousands). The following allocation is preliminary and is subject to
revision during the allocation period as the Company has not obtained all
necessary appraisals of the property and equipment purchased nor has the Company
completed the process of obtaining information about the fair value of the
acquired assets and assumed liabilities. All of the goodwill from this
transaction will be allocated to the Company's Environmental and Infrastructure
segment.

Accounts receivable and costs and earnings in excess of billings on uncompleted contracts $ 193,510
Property, plant and equipment 27,500
Deferred income taxes 35,000
Other assets 49,260
Goodwill 76,383
Accounts payable (189,898)
Billings in excess of cost and estimated earnings on uncompleted contracts (8,876)
Gross margin reserves (30,000)
Debt and bank loans (7,511)
Other liabilities (2,739)
---------
Purchase price (net of cash received at acquisition and from surety of $22,334) $ 142,629
=========

The following summarized pro-forma income statement data reflects the impact the
acquisition of the IT Group would have had on the three months and nine months
ended May 31, 2002 and 2001, respectively, as if the acquisition had taken place
at the beginning of the applicable fiscal year (in thousands, except per share
amounts):

The unaudited pro-forma results for the three months and nine months ended May
31, 2002 and 2001 have been prepared for comparative purposes only and do not
purport to be indicative of the amounts which actually would have resulted had
the acquisition occurred on September 1, 2000 or which may be realized in the
future.

Included in IT Group's and the pro forma results for the nine-month period ended
May 31, 2002 is a $167,000,000 reduction in revenues from a reduction of
accounts receivable to estimated net realizable value. During the fourth quarter
of 2001, IT Group recorded a charge to reduce accounts receivable and revenues
by $167,000,000, including $35,000,000 relating to estimated claims recovery.
This charge resulted from changes in estimates caused by vendor issues,
liquidity issues, and ultimately IT Group's filing for protection under the
Chapter 11 of the U.S. Bankruptcy Code. All of the preceding factors led to IT
Group's inability to complete contracts and were factors in recording the
charge.

10

Also included in IT Group's and the pro forma results for the nine-month period
ended May 31, 2002 is a special charge of $15,400,000, comprised of the
write-off of $5,000,000 of officers' loans (notes receivable from employees) and
a $10,000,000 facilities charge relating primarily to minimum lease commitments
and the associated payment obligations due after 2001. In addition, general and
administrative expenses included in IT Group's and the pro forma results for the
nine-month period ended May 31, 2002 were significantly higher than the
comparative period in 2001 due to non-recurring adjustments of approximately
$35,000,000 comprised of $12,500,000 for legal and consulting expenses
associated with IT Group's bankruptcy estate proceedings and $22,500,000
resulting primarily from employee related accruals and the write-off of various
assets.

Included in IT Group's and the pro forma results for the nine-month period ended
May 31, 2001 is a special charge of $40,700,000, comprised of $37,500,000 for
changes in estimates on accounts receivable and $3,200,000 relating to other
items. The accounts receivable portion of the charge primarily reduced the
carrying value of project claims which have been in protracted litigation and
adjusted the close-out value of certain acquired accounts receivable. In the
fourth quarter of calendar 2000, IT Group adopted a strategy to accelerate the
resolution of these project claims. The special charge related to the project
claims represented estimates of reduced recoverability of the project claims
under the acceleration resolution strategy as part of the Company's debt
reduction plan. Many of these project claims were acquired as part of IT Group's
previous business combinations.

The Company acquired with the IT Group purchase certain contracts with lower
than market rate margins primarily because IT Group had entered into some lower
margin contracts to improve its cash flow. These contracts were adjusted to
their estimated fair value as of the acquisition date (May 3, 2002) and a
liability (gross margin reserve) of approximately $30,000,000 was established.
As discussed above, the Company has not completed the process of obtaining
information about the fair value of the acquired assets and assumed liabilities
including the fair value of the assumed contracts. Therefore, the amount of the
gross margin reserves is preliminary and subject to revision. Commencing with
the initial recording of these reserves on May 3, 2002, the reserves are reduced
as work is performed on the contracts and such reduction in the reserve balance
results in a reduction in cost of sales and a corresponding increase in gross
profit. The reduction of these reserves for the period ended May 31, 2002 is not
material. The activity in these reserves is included in the table at the end of
this Note 4.

Stone & Webster Acquisition

On July 14, 2000, the Company purchased substantially all of the operating
assets of Stone & Webster, Incorporated ("Stone & Webster"), a global provider
of engineering, procurement, construction, consulting and environmental services
to the power, process, environmental and infrastructure markets. The acquisition
was concluded as part of a proceeding under Chapter 11 of the Bankruptcy Code
for Stone & Webster. This transaction was accounted for under the purchase
method of accounting.

The Company believes that, pursuant to the terms of the Stone & Webster
acquisition agreement, it assumed only certain specified liabilities, which the
Company has estimated to be approximately $740,000,000. The Company believes
that liabilities excluded from this acquisition include liabilities associated
with certain contracts in progress, completed contracts, claims or litigation
that relate to acts or events occurring prior to the acquisition date, and
certain employee benefit obligations, including Stone & Webster's U.S. defined
benefit plan (collectively, the "excluded items"). The Company, however, cannot
provide assurance that it has no exposure with respect to the excluded items
because, among other things, the bankruptcy court has not finalized its
validation of claims filed with the court. The final amount of assumed
liabilities may change as a result of the validation of the claims process;
however, the Company believes, based on its review of claims filed, that any
such adjustment to the assumed liabilities and future operating results will not
be material.

11

The Company acquired a large number of contracts with either inherent losses or
lower than market rate margins primarily because Stone & Webster's previous
financial difficulties had negatively affected the negotiation and execution of
the contracts. These contracts were adjusted to their estimated fair value as of
the acquisition date (July 14, 2000) and a liability (gross margin reserve) of
$121,815,000 was established, including adjustments of $38,118,000 recorded
during the allocation period. The amount of the accrued future cash losses on
assumed contracts with inherent losses (contract loss reserve) was estimated to
be approximately $41,700,000 (including approximately $5,400,000 of allocation
period adjustments), and a liability of such amount was established. The
adjustments to these reserves during the allocation period resulted from a more
accurate determination of the actual contract status at acquisition date.
Commencing with the initial recording of these reserves in the year ended August
31, 2000, the reserves have been reduced as work is performed on the contracts
and such reduction in the reserve balances results in a reduction in cost of
sales and a corresponding increase in gross profit. The reserve adjustments, as
well as the decreases in the cost of sales for the periods indicated, are
included in the table at the end of this Note 4.

The Company acquired several contracts under which Stone & Webster was
contractually obligated to pay liquidated damages or for which the scheduled
project completion date was beyond the contract completion date agreed to with
the customer, which would require the Company to pay liquidated damages upon
completion of the project. In addition, several acquired contracts contained
warranty provisions requiring achievement of acceptance and performance testing
levels or payment of filed liens or claims on the project. The Company recorded
reserves of approximately $42,000,000 at the acquisition date related to these
contracts. During the three and nine months ended May 31, 2002, the Company paid
approximately $900,000 and $1,900,000, respectively, related to these
liabilities; therefore, the remaining reserve balance is approximately
$40,100,000. Additional payments are anticipated toward the completion of the
contracts or during the warranty periods. The ultimate amount of these payments
may vary depending upon the actual completion date compared to the current
scheduled completion date, the amount needed to resolve the performance
requirements, and final negotiations with the customers or lien holders. To the
extent the final settlement or payment amount is different than the reserve
established, the difference will be reflected in results of operations in the
period the difference is known.

PPM Acquisition

In connection with its acquisition of substantially all of the assets of PPM
Contractors, Inc. ("PPM") in July 2000, the Company determined that PPM achieved
certain target sales levels as of December 31, 2001, and as a result, the
Company owed additional consideration to PPM of approximately $2,000,000
pursuant to the terms of the acquisition agreement. Accordingly, the Company
issued 83,859 shares of Common Stock to cover its obligation under the
agreement. The entire cost of approximately $2,000,000 associated with the
issuance of these shares is recorded as of May 31, 2002 as an increase to
goodwill for the PPM acquisition.

Gross Margin and Contract Loss Reserves

The following table presents the additions to and utilization of the gross
margin reserves and contract loss reserves for both the IT Group and Stone &
Webster acquisitions on a combined basis for the periods indicated (in
thousands):

Note 5 - Inventories

The major components of inventories consist of the following (in thousands) as
of the dates indicated:

Note 6 - Investment in Unconsolidated Entities

During the three and nine months ended May 31, 2002, the Company recognized a
$500,000 loss from Shaw-Nass Middle East, W.L.L., the Company's Bahrain joint
venture ("Shaw-Nass"). As of May 31, 2002 and August 31, 2001, the Company had
outstanding receivables from Shaw-Nass totaling $5,979,000 and $6,178,000,
respectively. These receivables relate primarily to inventory and equipment sold
to Shaw-Nass.

During the three and nine months ended May 31, 2002, the Company recognized
earnings of approximately $984,000 and $2,148,000, respectively, from the
operations of its EntergyShaw joint venture. The Company had outstanding trade
accounts receivable from EntergyShaw totaling approximately $2,302,000 and
$4,848,000 at May 31, 2002 and August 31, 2001, respectively. Additionally, the
Company received a distribution of $2,000,000 from Entergy/Shaw during the three
months ended May 31, 2002.

As is common in the engineering, procurement and construction industries, the
Company executed certain contracts jointly with third parties through joint
ventures, limited partnerships and limited liability companies. The investments
included on the accompanying Condensed Consolidated Balance Sheets as of May 31,
2002 and

13

August 31, 2001 are $22,968,000 and $10,966,000, respectively, which generally
represents the Company's cash contributions and earnings from these investments,
net of distributions received.

Note 7 - Debt

Revolving Lines of Credit

The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit Facility to $350,000,000 from $300,000,000 and to eliminate the previous
$150,000,000 limit on letters of credit. The Company also has the option to
further increase the Credit Facility under existing terms to $400,000,000, if
certain conditions are satisfied, including the successful solicitation of
additional lenders or increased participation of existing lenders. The amended
Credit Facility allows the Company to borrow either at interest rates (i) in a
range of 1.50% to 2.25% over the London Interbank Offered Rate ("LIBOR") or (ii)
from the prime rate to 0.75% over the prime rate. The Company selects the
interest rate index and the spread over the index is dependent upon certain
financial ratios of the Company. The Credit Facility is secured by, among other
things, (i) guarantees by the Company's domestic subsidiaries; (ii) a pledge of
all of the capital stock in the Company's domestic subsidiaries and 66% of the
capital stock in certain of the Company's foreign subsidiaries; and (iii) a
security interest in all property of the Company and its domestic subsidiaries
(except real estate and equipment). The Credit Facility also contains
restrictive covenants and other restrictions, which include but are not limited
to the maintenance of specified ratios and minimum capital levels and limits on
other borrowings, capital expenditures and investments. Additionally, the Credit
Facility established a $25,000,000 aggregate limit on the amount of the
Company's Treasury Stock purchases and/or LYONs repurchases to be made
subsequent to February 28, 2002, without prior consent. As of May 31, 2002, the
Company was in compliance with these covenants or had obtained the necessary
waivers. At May 31, 2002, letters of credit of approximately $173,900,000 and no
revolving credit loans were outstanding under the Credit Facility. The Company's
total availability under the Credit Facility at May 31, 2002 was approximately
$176,100,000.

At May 31, 2002, the Company's foreign subsidiaries had short-term revolving
lines of credit permitting borrowings totaling approximately $16,200,000. These
subsidiaries had outstanding borrowings under these lines of approximately
$532,000 at May 31, 2002.

LYONs Convertible Securities

Effective May 1, 2001, the Company issued and sold $790,000,000 (including
$200,000,000 to cover over-allotments) of 20-year, zero-coupon, unsecured,
convertible debt, Liquid Yield Option(TM) Notes ("LYONs", "debt" or "the
securities"). The debt was issued at an original discount price of $639.23 per
$1,000 maturity value and has a yield to maturity of 2.25%. The debt is senior
unsecured obligations of the Company and is convertible into the Company's
Common Stock at a fixed ratio of 8.2988 per $1,000 maturity value or an
effective conversion price of $77.03 at the date of issuance. Under the terms of
the issue, the conversion rate may be adjusted for certain factors as defined in
the agreement including but not limited to dividends or distributions payable on
Common Stock, but will not be adjusted for accrued original issue discount. The
Company realized net proceeds, after expenses, from the issuance of these
securities of approximately $490,000,000. The Company used these proceeds to
retire outstanding indebtedness and for general corporate purposes, including
investment in AAA rated, short-term marketable securities held until maturity
and cash equivalents.

The holders of the debt have the right to require the Company to repurchase the
debt on the third, fifth, tenth, and fifteenth anniversaries at the then
accreted value. The Company has the right to fund such repurchases with shares
of its Common Stock, cash, or a combination of Common Stock (at the then current
market value) and cash. The

14

debt holders also have the right to require the Company to repurchase the debt
for cash, at the accreted value, if there is a change in control of the Company,
as defined, occurring on or before May 1, 2006. The Company may redeem all or a
portion of the debt at the accreted value, through cash payments, at any time
after May 1, 2006.

Note 8 - Comprehensive Income

Comprehensive income for a period encompasses net income and all other changes
in a company's equity other than from transactions with the company's owners.
Comprehensive income was comprised of the following (in thousands) for the
periods indicated:

The foreign currency translation adjustments primarily relate to the varying
strength of the U.S. dollar in relation to the British pound, Australian and
Canadian dollars, Venezuelan Bolivars, and the Euro (Dutch guilder prior to
January 1, 2002).

The Company's hedging activities (which are generally limited to foreign
exchange transactions) during the three and nine months ended May 31, 2002 and
2001 were not material.

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Note 9 - Business Segments

As a result of the IT Group acquisition, the Company formed a third operating
segment, Environmental and Infrastructure. The Company's other two operating
segments are the Integrated EPC Services segment and the Manufacturing and
Distribution segment. The following table presents information about segment
profits and assets (in thousands) for the periods indicated:

Environmental and Infrastructure sales and net income that had previously been
reported in the Integrated EPC Services segment have been reclassified to the
Environmental and Infrastructure segment.

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Note 10 - Earnings Per Common Share

Computations of basic and diluted earnings per share are presented below.

For the three and nine months ended May 31, 2002, the Company had approximately
95,000 and 110,000, respectively, of weighted-average incremental shares related
to stock options that were excluded from the calculations of diluted income per
share because they were antidilutive. For the three and nine months ended May
31, 2001, no outstanding stock options were antidilutive.

17

Note 11 - Goodwill and Other Intangibles

In July 2001, the Financial Accounting Standards Board (FASB) issued two new
accounting standards SFAS No. 141 - "Business Combinations" and SFAS No. 142 -
"Goodwill and Other Intangible Assets." These new standards significantly
changed prior practices by: (i) terminating the use of the pooling-of-interests
method of accounting for future business combinations, (ii) ceasing goodwill
amortization, and (iii) requiring impairment testing of goodwill based on a fair
value concept. SFAS No. 142 requires that impairment testing of the opening
goodwill balances be performed within six months from the start of the fiscal
year in which the standard is adopted and that any impairment be written off and
reported as a cumulative effect of a change in accounting principle. It also
requires that another impairment test be performed during the fiscal year of
adoption of the standard and, that impairment tests should be performed at least
annually thereafter, with interim testing required if circumstances warrant.

Effective September 1, 2001, the Company adopted SFAS No. 141 and No. 142.
Therefore, the Company has ceased to amortize goodwill in fiscal 2002. For the
three and nine months ended May 31, 2001, goodwill amortization was
approximately $4,200,000 and $12,100,000 respectively. Additionally, the Company
has determined that its goodwill balances were not impaired as of September 1,
2001, and accordingly, no adjustments were made to its goodwill balances as a
result of the adoption of SFAS No. 142.

SFAS No. 142 provides that prior year's results should not be restated. The
following table presents the Company's comparative operating results for the
three-month and nine-month periods ended May 31, 2002 and 2001 reflecting the
exclusion of goodwill amortization expense in fiscal 2001.

Changes in the carrying value of goodwill from September 1, 2001 to May 31, 2002
are as follows (in thousands):

18

The goodwill associated with the IT Group acquisition has been preliminarily
calculated as of May 31, 2002. The Company expects to revise this balance during
the one year allocation period as the Company has not obtained all necessary
appraisals of the property and equipment it purchased nor has it completed its
other review and valuation procedures of the assets acquired and the liabilities
assumed.

Upon inclusion of Beneco's assets and liabilities in the aggregate purchase
price allocation of ITG, the Company believes its goodwill will be reduced by
approximately $15,000,000.

The Company's only significant amortizable intangible asset at May 31, 2002 was
its proprietary ethelyene technology. At May 31, 2002, the gross carrying amount
included in other assets and accumulated amortization for this asset was
$28,500,000 and $3,335,000 respectively. The Company is amortizing this asset on
a straight-line basis over 15 years and the annual amortization expense is
approximately $1,900,000. This intangible asset is still subject to impairment
testing.

Note 12 - Changes in Accounting Principles

In June 2001, the FASB issued SFAS No. 143 - "Accounting for Asset Retirement
Obligations." This statement, which is first effective for the Company beginning
in fiscal 2003, requires that the cost of legal obligations associated with the
retirement and/or removal of long-lived assets should be accounted for as
additional asset costs and that the net present value of the retirement/removal
costs be recorded as a liability. Asset values (to include retirement and
removal costs) are subject to impairment reviews pursuant to SFAS No. 144 (see
below). The Company is currently reviewing provisions of SFAS No. 143 to
determine if it will have an effect on the Company, particularly with respect to
assets that were acquired in the IT Group acquisition.

In August 2001, the FASB also issued SFAS No. 144 - "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes FASB No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." The new statement also supersedes certain aspects of APB 30 -
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," with regard to reporting the effects of a disposal of
a segment of a business and will require expected future operating losses from
discontinued operations to be reported in discontinued operations in the period
incurred rather than as of the measurement date as presently required by APB 30.
Additionally, certain dispositions may now qualify for discontinued operations
treatment. The provisions of the statement are required to be applied for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. Upon adoption, the Company does not expect this statement will have a
material effect on its financial statements.

In May 2002, the FASB also issued SFAS No. 145 - "Recission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" which is effective for fiscal years beginning after May 15, 2002.
This statement, among other matters, provides guidance with respect to the
accounting for gain or loss on capital leases which were modified to become
operating leases. The statement also eliminates the requirement that gains or
losses on the early extinguishment of debt be classified as extraordinary items
and provides guidance when the gain or loss on the early retirement of debt
should or should not be reflected as an extraordinary item. The Company does not
expect this statement to have a material effect on its financial statements when
it becomes effective.

19

PART I - FINANCIAL INFORMATION

ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion summarizes the financial position of The Shaw Group
Inc. and its subsidiaries (hereinafter referred to collectively, unless the
context otherwise requires, as "the Company" or "Shaw") at May 31, 2002, and the
results of their operations for the three-month and nine-month periods then
ended and should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Quarterly Report on Form 10-Q.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The statements contained in this
Quarterly Report on Form 10-Q that are not historical facts (including without
limitation statements to the effect the Company or Shaw or its management
"believes," "expects," "anticipates," "plans," or other similar expressions) are
forward-looking statements. These forward-looking statements are based on the
Company's current expectations and beliefs concerning future developments and
their potential effects on the Company. There can be no assurance that future
developments affecting the Company will be those anticipated by the Company.
These forward-looking statements involve significant risks and uncertainties
(some of which are beyond the control of the Company) and assumptions. They are
subject to change based upon various factors, including but not limited to the
following risks and uncertainties: changes in the demand for and market
acceptance of the Company's products and services; changes in general economic
conditions, and, specifically, changes in the rate of economic growth in the
United States and other major international economies; the presence of
competitors with greater financial resources and the impact of competitive
products, services and pricing; the cyclical nature of the individual markets in
which the Company's customers operate; changes in investment by the energy,
power and environmental industries; the availability of qualified engineers and
other professional staff needed to execute contracts; the uncertain timing of
awards and contracts; cost overruns on fixed, maximum or unit priced contracts;
cost overruns which negatively affect fees to be earned or cost variances to be
shared on cost plus contracts; changes in trade, monetary and fiscal policies
worldwide; currency fluctuations; the effect of the Company's policies,
including but not limited to the amount and rate of growth of Company expenses;
the continued availability to the Company of adequate funding sources; delays or
difficulties in the production, delivery or installation of products and the
provision of services; the ability of the Company to successfully integrate
acquisitions; the protection and validity of patents and other intellectual
property; and various legal, regulatory and litigation risks. Should one or more
of these risks or uncertainties materialize, or should any of the Company's
assumptions prove incorrect, actual results may vary in material respects from
those projected in the forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. For a more detailed
discussion of some of the foregoing risks and uncertainties, see the Company's
filings with the Securities and Exchange Commission.

General

The Company now has three operating segments: Integrated EPC (engineering,
procurement and construction - "EPC") Services, Environmental and
Infrastructure, and Manufacturing and Distribution.

20

Integrated EPC Services

As a result of its acquisition of Stone and Webster Inc. (Stone & Webster) in
July 2000 and the merger of Stone & Webster into the Company's Integrated EPC
segment, the Company became the world's only vertically-integrated provider of
complete piping systems and comprehensive engineering, procurement and
construction services to the power generation industry. Approximately 48% of the
Company's total backlog at May 31, 2002 was attributable to the power generation
industry. The Integrated EPC segment also provides services to various process,
oil and gas and other industries, and at May 31, 2002 approximately 10% of the
Company's backlog was for these industries. The Integrated EPC segment's
financial performance is impacted by the broader economic trends affecting its
customers. All of the major industries in which the Integrated EPC segment
operates are cyclical. Because the Integrated EPC segment is able to provide
services that are used in a broad range of industries, the Company's experience
has generally been that downturns in certain of the Integrated EPC segment's
industry sectors may be mitigated by opportunities in others.

Environmental and Infrastructure

On May 3, 2002 and June 15, 2002, the Company acquired substantially all of the
operating assets and assumed certain liabilities of the IT Group, Inc. ("IT
Group") and its wholly-owned subsidiaries including Beneco Enterprises, Inc.
("Beneco"). IT Group and Beneco are referred to herein collectively as "ITG."
ITG was a leading provider of diversified environmental consulting, engineering,
and construction, remediation and facilities management services (primarily for
government and military facilities). The Company's primary reasons for the
acquisition were to diversify and expand the Company's revenue base into less
cyclical industries and to pursue opportunities in environmental,
infrastructure, and Homeland Defense markets. The Company has formed a new
wholly owned subsidiary, Shaw Environmental and Infrastructure, Inc. ("Shaw
E&I") into which it will combine the operations of the acquired ITG businesses
and the Company's existing environmental and infrastructure operations. At May
31, 2002, approximately 42% of the Company's total backlog was attributable to
its Environmental and Infrastructure segment.

The ITG acquisition will substantially increase the volume and scope of the
Company's environmental and infrastructure operations. For additional
information regarding the ITG and Stone & Webster acquisitions, see Note 4 of
Notes to Condensed Consolidated Financial Statements and - Liquidity and Capital
Resources below.

Manufacturing and Distribution

The Manufacturing and Distribution segment manufactures and distributes
specialty stainless, alloy and carbon steel pipe fittings. These fittings
include elbows, tees, reducers and stub ends. Manufacturing and Distribution
backlog was approximately $4.1 million at May 31, 2002.

Comments Regarding Future Operations

Historically, the Company has used acquisitions to pursue market opportunities
and to augment or increase existing capabilities and plans to continue to do so.
However, all comments concerning the Company's expectations for future sales and
operating results are based on the Company's forecasts for its existing
operations and do not include the potential impact of any other acquisition.

Critical Accounting Policies and Related Estimates That Have a Material Effect
- ------------------------------------------------------------------------------
on the Company's Consolidated Financial Statements
- --------------------------------------------------

In accordance with recent Securities and Exchange Commission guidance, set forth
below is a discussion of the

21

accounting policies and related estimates that the Company believes are the most
critical to understanding its consolidated financial statements, financial
condition, and results of operations and which require complex management
judgments, uncertainties and/or estimates. Information regarding the Company's
other accounting policies is included in its Annual Report on Form 10-K for the
year ended August 31, 2001.

Engineering, Procurement and Construction Contract Revenue Recognition and
Profit and Loss Estimates

A substantial portion of the Company's revenue from both the Integrated EPC
Services and Environmental and Infrastructure segments is derived from
engineering, procurement and construction contracts. The contracts may be
performed as stand-alone engineering, procurement or construction contacts or as
combined contracts (i.e., one contract that covers engineering, procurement and
construction or a combination thereof). The Company utilizes accounting
principles set forth in American Institute of Certified Public Accountants
("AICPA") Statement of Position 81-1 - "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and other applicable
accounting standards to account for its long-term contracts. The Company
recognizes revenue for these contracts on the percentage-of-completion method,
usually based on costs incurred to date, compared with total estimated contract
costs. Most of the Company's contracts are cost reimbursable. Revenues from
cost-plus-fee contracts are recognized on the basis of costs incurred during the
period plus the fee earned. Profit incentives are included in revenues when
their realization is reasonably assured.

Provisions for estimated losses for uncompleted contracts are made in the period
in which such losses are identified. The cumulative effect of other changes to
estimated contract profit and loss, including those arising from contract
penalty provisions, final contract settlements and reviews performed by
customers, are recognized in the period in which the revisions are identified.
To the extent that these adjustments result in a reduction or elimination of
previously reported profits, the Company would report such a change by
recognizing a charge against current earnings, which might be significant
depending on the size of the project or the adjustment. An amount equal to the
costs attributable to unapproved change orders and claims is included in the
total estimated revenue when realization is probable. Profit from unapproved
change orders and claims is recorded in the year such amounts are resolved.

As is common to the construction industry and inherent in the nature of the
Company's contracts, it is possible that that there will be future (and
currently unknown) significant adjustments to the Company's currently estimated
contract revenues, costs and gross margins for contracts currently in process,
particularly in the latter stages of the contracts. These future adjustments
could, depending on either the magnitude of the adjustments and/or the number of
contracts being completed, materially (positively or negatively) affect the
Company's operating results in an annual or quarterly reporting period. Such
future adjustments are, in the opinion of the Company's management, most likely
to occur as a result of, or be affected by, the following factors in the
application of the percentage-of-completion accounting method (discussed above)
for the Company's contracts.

A. Revenues and gross margins from cost reimbursable, long-term contracts can
--------------------------------------------------------------------------
be significantly affected by contract incentives/penalties that may not be
--------------------------------------------------------------------------
known or recorded until the latter stages of the contracts. Substantially
-----------------------------------------------------------
all of the Company's revenues from cost-reimbursable contracts are based on
costs incurred plus the fee earned (before unrealized
incentives/penalties). The application of the Company's revenue recognition
practices for these types of contracts usually results in the Company
recognizing revenues ratably with a consistent gross profit margin with the
occurrence of costs and construction progress during most of the contract
term (which may extend for one to five years).

The Company's cost reimbursable contracts are generally structured as
either target cost or cost plus contracts. Target cost contracts contain an
incentive/penalty arrangement in which the Company's fee is adjusted,
within certain limits, for cost underruns/overruns to an established
(target) price, representing the Company's estimated cost and fee for the
project. Cost plus contracts reimburse the Company for all of its costs,
but

22

generally limit the Company's fee to a fixed percentage of costs or to a
certain specified amount. Usually, target-cost contracts are priced with
higher fees than cost plus contracts because of the uncertainties relating
to an adjustable fee arrangement. Additionally, both the target cost and
cost reimbursable contracts frequently have other incentive and penalty
provisions for such matters as liquidated damages and testing or
performance results.

Generally, the penalty provisions for the Company's cost reimbursable
contracts are "capped" to limit the Company's monetary exposure to a
portion of the contract gross margin. Although the Company believes it is
unlikely that it could incur losses or lose all of its gross margin on its
cost reimbursable contracts, it is possible for penalties to reduce or
eliminate previously recorded profits. The incentive/penalty provisions are
usually finalized as contract change orders either subsequent to
negotiation with or verification by, the Company's customers.

In most situations, the amount and impact of incentives/penalties are not,
or cannot be, determined until the latter or completion stages of the
contract, at which time the Company will record the adjustment amounts on a
cumulative, catch-up basis.

B. The accuracy of gross margins from fixed-price contracts is dependent on
------------------------------------------------------------------------
the accuracy of cost estimates and other factors. The Company has a limited
-------------------------------------------------
number of fixed price contracts, most of which were entered into on a
negotiated basis. The Company has very few fixed price contacts that were
awarded based on competitive bids.

The accuracy of the gross margins the Company reports for fixed-price
contracts is dependent upon various judgments it makes with respect to its
contract performance, its cost estimates, and its ability to recover
additional contract costs through change orders or claims. Further, many of
these contracts also have incentive/penalty provisions, which are not
finalized until the latter or completion stages of the contract.

The Company recognizes adjustments to the gross margin on fixed-priced
contracts for changes in its cost estimates, finalization of
incentives/penalties, etc on a cumulative, catch-up method, when such
adjustments are known or probable.

The revenue recognition policies related to the Company's fabrication contracts,
consulting services, and pipe fittings and manufacturing operations are
described in the Company's latest Form 10-K for the year ended August 31, 2001
filed with the Securities and Exchange Commission. Because of the nature of the
contracts and related work, estimates and judgments usually do not play as
important a role in the determination of revenue and profit and loss for these
services as they do for the engineering, procurement and construction contracts.

Acquisitions - Fair Value Accounting and Goodwill Impairment

Goodwill represents the excess of the cost of acquired businesses over the fair
market value of their identifiable net assets. The Company's goodwill balance as
of May 31, 2002 was approximately $447 million, most of which related to the
Stone & Webster acquisition (see Note 4 of Notes to Condensed Consolidated
Financial Statements).

In the first quarter of fiscal 2002, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standard ("SFAS")
No. 142 - "Goodwill and Other Intangible Assets," which was issued in July 2001.
SFAS No. 142 deals with, among other matters, the accounting for goodwill. SFAS
No. 142 requires that goodwill no longer be amortized, but that impairment of
goodwill assets must be reviewed on a regular basis based on a fair value
concept. SFAS No. 142 also removed certain differences between book and tax
expense,

23

which has resulted in a reduction of the Company's effective tax rate. If SFAS
No. 142 had been in effect during fiscal 2001, the Company estimates that its
fiscal 2001 diluted earnings per share would have been increased by
approximately $0.08 per share and $0.23 per share for the three and nine months
ended May 31, 2001, respectively. This increase in diluted earnings per share
would have resulted from the cessation of goodwill amortization and a lower
effective tax rate.

The Company has completed the impairment tests required with the adoption of
SFAS No. 142 and determined that its goodwill was not impaired. Further, there
is no current indication that its goodwill is or will be impaired. However, the
Company's businesses are cyclical and subject to competitive pressures.
Therefore, it is possible that the goodwill values of the Company's businesses
could be adversely impacted in the future by these or other factors and that a
significant impairment adjustment could possibly be required in such
circumstances.

Additionally, the Company's estimates of the fair values of the assets and
liabilities it acquires in acquisitions are determined by reference to various
internal and external data and judgments, including the use of third party
experts. These estimates can and do differ from the basis or value (generally
representing the acquired entity's actual or amortized cost) previously recorded
by the acquired entity for its assets and liabilities.

Accordingly, the Company's post acquisition financial statements are materially
impacted by and dependent on the accuracy of management's fair value estimates
and adjustments. These estimates can also have a positive or negative material
affect on future reported operating results. Further, the Company's future
operating results may also be positively or negatively materially impacted if
the final values for the assets acquired or liabilities assumed in its
acquisitions are materially different from the fair value estimates which the
Company recorded for the acquisition.

Earnings Per Share and Potential Equity Effect of Convertible Debt (LYONs)

Effective May 1, 2001, the Company issued and sold $790 million (including $200
million to cover over-allotments) of 20-year, zero-coupon, unsecured,
convertible debt, Liquid Yield Option(TM) Notes ("LYONs", "debt" or "the
securities"). The debt was issued at an original discount price of $639.23 per
$1,000 maturity value and has a yield to maturity of 2.25%. The Company realized
net proceeds after expenses from the issuance of this debt of approximately $490
million. The debt is senior unsecured obligations of the Company and is
convertible into the Company's Common Stock at a fixed ratio of 8.2988 shares
per $1,000 maturity value ("contract conversion rate") or an effective
conversion price of $77.03 at the date of issuance.

In addition to the above conversion feature, the holders of the debt have the
right to require the Company to repurchase the debt on the third, fifth, tenth,
and fifteenth anniversaries of issuance at the then accreted value. The Company
has the right to fund such repurchases with shares of its Common Stock (at the
current market value), or cash, or a combination of Common Stock (valued at the
current market value) and cash.

The Company has, in accordance with SFAS No. 128 - "Earnings per Share,"
computed its diluted earnings per share using the "if converted method"
assumption that the LYONs would be converted at the contract rate of 8.2988
shares per $1,000 maturity value (or an approximate equivalent conversion price
of approximately $78.92 at May 31, 2002). Under this method the Company has
reported diluted earnings per share to reflect approximately 6,556,000
additional shares on the basis that the debt would be converted into Common
Stock at a rate of 8.2988 shares per $1,000 maturity value, if the effect was
dilutive. Additionally, the Company has presented the debt as long-term debt (as
opposed to equity) on its balance sheet.

It is the Company's plan to use cash to repurchase some, or all, of the
convertible debt that may be submitted for repurchase. Therefore, pursuant to
SFAS No. 128, the Company's financial statements do not reflect the effect on
diluted earnings per share that could result from the issuance of additional
shares of its Common Stock resulting

24

from the submission by the holders of the convertible debt for repurchase on the
specified anniversary dates. The Company believes, however, that depending on
the magnitude of repurchase requests, it is possible that it could issue shares
to satisfy a portion of any repurchase requirements. Further, it is possible
that in adverse circumstances, such as a combination of a large number of
repurchase requests, low stock price and/or liquidity or financing restraints,
the Company could be required to issue a significant number of shares to satisfy
its repurchase obligations and the number of shares actually issued could exceed
the number of shares presently being utilized by the Company to compute diluted
earnings per share. See Note 10 of Notes to Condensed Consolidated Financial
Statements. The issuance of a large number of shares could significantly dilute
the value of the Company's Common Stock and materially affect its diluted
earnings per share calculations.

25

Results of Operations
- ---------------------

The following table sets forth, for the periods indicated, the percentages of
the Company's net sales that certain income and expense items represent:

Sales increased by 129% to $902.6 million for the three months ended May 31,
2002 as compared to $394.2 million for the same period in the prior year. Sales
increased by 67% to $1,922.5 million for the nine months ended May 31, 2002 as
compared to $1,153.2 million for the same period in the prior year. The Company
expects that its revenues will remain at levels comparable with its third
quarter results in the fourth quarter of fiscal 2002 and during fiscal 2003. The
future sales levels represent significant increases from the Company's prior
operations and are primarily attributable to (i) progress on significant EPC
contracts entered into during fiscal 2001 requiring the procurement of large
equipment items and (ii) sales from the operations of the recently acquired ITG
businesses. Most of the Companies sales increase was provided by the Company's
Integrated EPC Services segment, as its sales for the three and nine months,
ended May 31, 2002 increased by $441.3 million and $726.7 million, respectively.
Environmental and Infrastructure sales increased by $69.6 million and $42.1
million, for the three and nine months ended May 31, 2002, respectively,
primarily as a result of the IT Group acquisition. Manufacturing and
Distribution sales decreased $2.4 million for the three months ended May 31,
2002 and increased by $0.4 million for the nine months ended May 31, 2002. See
Note 9 of Notes to Condensed Consolidated Financial Statements. The Company's
sales to customers in the following geographic regions approximated the
following for the periods indicated:

26

Other North America includes Canada, Mexico and Bermuda. The May 2001 totals for
the United States, Other North America and Other have been adjusted to reflect
the current set of geographic regions.

United States (Domestic) Sales

Sales for domestic projects increased $503.8 million, or 167%, to $805.9 million
for the three months ended May 31, 2002 from $302.1 million for the three months
ended May 31, 2001. For the nine months ended May 31, 2002, sales for domestic
projects increased $710.5 million, or 78%, to $1,624.9 million from $914.4
million for the nine months ended May 31, 2001. Domestic power generation sales
increased $446.9 million and $713.4 million for the three and nine months ended
May 31, 2002, respectively, as compared with the same periods in fiscal 2001 as
a result of significant contracts entered into in fiscal 2001. Environmental and
infrastructure sales for the three and nine months ended May 31, 2002 increased
by $65.0 million and $37.5 million, respectively, as compared with the same
periods in fiscal 2001. This increase is primarily attributable to the IT Group
acquisition. Process industries sales for the three and nine months ended May
31, 2002 were approximately $18.8 million and $60.7 million, respectively, less
than such sales for the same periods in fiscal 2001. These decreases were
attributable to industry trends and the Company's decision not to pursue low
margin projects such as those it assumed in the Stone & Webster acquisition.
Domestic sales to other industries increased by approximately $10.6 million and
$20.2 million for the three and nine months periods ended May 31, 2002 as
compared with the same periods in fiscal 2001.

International Sales

Sales for international projects increased $4.6 million, or 5%, to $96.7 million
for the three months ended May 31, 2002 from $92.1 million for the same period
of the prior year. Sales for international projects increased $58.8

27

million, or 25%, to $297.6 million for the nine months ended May 31, 2002 from
$238.8 million for the same period of the prior year. The sales increase for the
nine months ended May 31, 2002 in the Asia/Pacific Rim region was primarily a
result of the work performed on a 600,000 tons per year ethylene plant in China
that is scheduled for completion in fiscal 2005. The Company expects future
sales increases in China as a result of a pipe fabrication joint venture formed
in China with Yangzi Petrochemical Company. Sales in Europe increased due to
more power generation projects in that region. Sales in Other North America
increased $4.3 million and $11.5 million in the three and nine months ended May
31, 2002 due to power generation projects that commenced in fiscal 2001. The
Company sales in the Middle East have increased as a result of process industry
sales. Sales in South America have increased over prior year levels but remain
sluggish partly as a result of the political situation in Venezuela.

The Company's sales to customers in the following industry sectors approximated
the following for the periods indicated:

Revenues from both domestic and international power generation projects for the
three-month and nine-month periods ended May 31, 2002 increased by a total of
$451.1 million and $741.5 million, respectively, as compared with the
three-month and nine-month periods ended May 31, 2001. Revenues from United
States and European operations were responsible for most of this increase. The
increases in the environmental and infrastructure market were a result of the
acquisition of the IT Group. Process industries had sales decreases in the
domestic markets. These domestic decreases were attributable to industry trends
and the Company's decision not to pursue low margin projects such as those it
assumed in the Stone & Webster acquisition. The increases in other industry
sales, which includes the oil and gas exploration and production industry,
resulted from increases in both domestic and foreign sales.

Gross profit increased 31% to $86.0 million in the three months ended May 31,
2002 from $65.5 million in the three months ended May 31, 2001 and increased 18%
to $216.4 million in the nine months ended May 31, 2002 from $183.1 million in
the nine months ended May 31, 2001. The gross profit margin percentage for the
three-month period ended May 31, 2002 decreased to 9.5% from 16.6% for the same
period the prior year. For the nine-month period ended May 31, 2002, the gross
profit margin percentage decreased to 11.3% from 15.9% for the same period of
the prior year.

28

The Company is involved in numerous projects, and, as a result, the Company's
consolidated gross profit margin percentages can be affected by many factors.
These include matters, such as product mix (e.g., engineering and consulting
versus construction and procurement), pricing strategies, foreign versus
domestic projects (profit margin percentages differ, sometimes substantially,
depending on the location of the work) and adjustments to project profit
estimates during the project term.

As a result of the Stone & Webster acquisition, additions to the Company's
backlog in fiscal 2001 included a higher percentage over prior periods of (i)
engineering, procurement and construction contracts and (ii) engineering,
procurement and construction contracts that require the procurement of large
equipment items. Accordingly, the percentage of the Company's sales related to
engineering, procurement and construction contracts and engineering, procurement
and construction contracts with large equipment purchases has increased during
the first nine months of fiscal 2002. Typically engineering, procurement and
construction contracts (particularly those with large equipment purchases) have
lower gross profit margin percentages than the Company's prior historical gross
profit margin percentages associated with pipe fabrication work.

Additionally, during fiscal 2001, as compared with prior periods, the Company
entered into more cost reimbursable contracts as opposed to fixed price
projects, many of which commenced in the latter part of fiscal 2001 and which
impacted gross margins in the first nine months of fiscal 2002. Cost
reimbursable contracts generally allow the Company to recover any cost overruns.
Therefore, cost reimbursable contracts are frequently priced with lower gross
margin percentages than fixed price contracts (such as some of the contracts
assumed in the Stone & Webster acquisition) because fixed priced contracts are
usually bid with higher margins to compensate for cost overrun risks. Further,
most of the contracts of ITG's businesses are also cost reimbursable. ITG's
contracts, many of which are with government agencies, also generally have lower
gross profit margins than the Company's commercial cost reimbursable contracts.
The Company expects that a substantial portion of its work in the final quarter
of fiscal 2002 and fiscal 2003 will be performed pursuant to cost reimbursable
contracts.

Because the Company has increased the number of (i) engineering, procurement and
construction contracts and engineering, procurement and construction contracts
requiring the procurement of large pieces of equipment and (ii) cost
reimbursable contracts, the Company's gross profit margin percentages were lower
in the first three quarters of fiscal 2002, compared with the same periods in
fiscal 2001. As a result of these factors and also because the margins for
contracts associated with the acquired ITG businesses are less than the
Company's historical gross margins, the Company expects that its 2003 gross
margin percentages will be more comparable with its fiscal 2002 gross margins
than to its fiscal 2001 gross margins.

General and administrative expenses, exclusive of goodwill recorded in fiscal
2001, increased to approximately $42.4 million and $106.3 million for the three
months and nine months ended May 31, 2002 as compared with $30.9 million and
$94.6 million for the similar periods ended May 31, 2001. The increase in
general and administrative costs is a result of substantially increased sales in
fiscal 2002 as compared with fiscal 2001 and the acquisition of the IT Group.
However, as a percentage of sales, general and administrative expenses,
exclusive of goodwill recorded in fiscal 2001, decreased to 4.7% and 5.5% for
the three months and nine months ended May 31, 2002 compared with 7.8% and 8.2%
for the same periods in fiscal 2001. The decrease in general and administrative
costs as a percentage of sales is primarily attributable to cost savings
realized from the integration of Stone & Webster and the Company's ability to
limit general and administrative cost increases as sales volume has increased.
The Company anticipates that total general and administrative expenses will
continue to increase as a result of the Company's growth, but the Company
expects that its general and administrative expenses will approximate 5% of
total sales in fiscal 2003.

In May 2001, the Company received approximately $490 million from the sale of
2.25% yield to maturity, 20-year zero-coupon, unsecured, convertible debt Liquid
Yield Option(TM) Notes (LYONs). The proceeds from this debt issue were used to
pay off most of the Company's outstanding borrowings, including the Company's
Credit Facility

29

on which the Company had been paying an interest rate of approximately 9% for
the quarter ended May 31, 2001. Interest expense for the quarter ended May 31,
2002 was $5.9 million, compared to $2.2 million for the same period of the prior
fiscal year. For the nine-month periods ended May 31, 2002 and 2001, interest
expense was $17.1 million and $10.0 million, respectively. The Company's
interest expense for the periods ended May 31, 2002 was higher than its interest
expense for the same periods in fiscal 2001 because of interest costs associated
with the LYONs borrowings and the low levels of borrowings in fiscal 2001. In
the quarter ended May 31, 2001, the Company had reduced its borrowings on its
Credit Facility as a result of the receipt of funds in December 2000 from (i)
its Common Stock offering and (ii) the sales of certain assets which were
purchased in the Stone & Webster acquisition. The Company's interest costs
include the amortization of loan fees associated with the LYONs and the Credit
Facility, and therefore, the Company's interest expense is higher than would be
expected based on its borrowing levels. The primary components (accretion of
zero-coupon discount interest and amortization of loan fees) of the Company's
interest expense are non-cash charges.

Interest income for the three and nine months ended May 31, 2002 was $4.0
million and $9.4 million, respectively, compared to $2.6 million and $3.6
million for the same periods of the prior fiscal year. The increase in interest
income was attributable to the Company's investment of LYONs proceeds that were
not used to reduce debt and/or have not been used for general corporate
purposes. However, the Company expects interest income to decrease in fiscal
2003 versus fiscal 2002 as a result of reductions in interest rates and interest
bearing assets.

The Company's effective tax rate for the three and nine months ended May 31,
2002 was 36% compared to 38.8% for the three and nine months ended May 31, 2001.
The tax rates for each period usually vary primarily due to the mix of foreign
(including foreign export sales) versus domestic work. However, the Company's
tax rate for fiscal 2002 was less than its fiscal 2001 tax rate primarily due to
the Company's adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142 (see Financial Accounting Standards Board Statements). As a result of
the Company's adoption of SFAS No. 142, it no longer recognizes goodwill
amortization expense in its financial statements, a portion of which is not
deductible for tax purposes.

Total backlog at May 31, 2002 and August 31, 2001 was approximately $6.1 billion
and $4.5 billion, respectively, and represents a $2.5 billion increase over the
$3.6 billion backlog reported at May 31, 2001. Approximately 89% of the backlog
relates to domestic projects, and roughly 53% of the backlog relates to work
currently anticipated to be completed during the 12 months following May 31,
2002. The Company's backlog is affected by the broader economic trends that
impact the Company's customers and is important in anticipating operational
needs.

The Company's Environmental and Infrastructure backlog increased to
approximately $2.6 billion at May 31, 2002 from approximately $300 million at
February 28, 2002. Substantially all of this $2.3 billion increase is
attributable to IT Group and Beneco backlog that the Company acquired with its
purchase of ITG. The environmental and infrastructure backlog includes the value
of awarded contracts and the estimated value of unfunded work. This unfunded
backlog generally represents various (federal, state and local) government
project awards for which the project funding has been partially authorized or
awarded by the relevant government authorities (e.g. authorization or an award
has been provided for only the initial year or two of a multi-year project).
Because of appropriation limitations in the governmental budget processes, firm
funding is usually made for only one year at a time, and, in some cases, for
periods less than one year, with the remainder of the years under the contract
expressed as a series of one-year options. Amounts included in backlog are based
on the contract's total awarded value and the Company estimates regarding the
amount of the award that will ultimately result in the recognition of revenue.
These estimates are based on the Company's experience with similar awards and
similar customers and average approximately 75% of the total unfunded awards.
Estimates are reviewed periodically and appropriate adjustments are made to the
amounts included in backlog and in unexercised contract options. The Company has
not included in backlog any awards (funded or unfunded) for work which is
expected to be performed more than 5 years after the date of the financial
statements.

30

In fiscal 2002, there has been a slowdown in construction activity and new
construction awards for power generation projects, primarily as a result of less
activity by certain Independent Power Producers ("IPPs") who have encountered
financing or liquidity problems. Although only a limited number of these IPPs
are customers of the Company, the Company has also been negatively impacted in
obtaining new power generation work and as a result, the Company's $2.9 billion
backlog for power generation projects as of May 31, 2002 is less than its $3.5
billion power generation backlog at August 31, 2001. As a result of this
slowdown, the Company has decreased its backlog in fiscal 2002 by approximately
$150 million to reflect a reduction in future sales to a major manufacturer of
turbines for which the Company provides fabrication services.

Additionally, the planning for new projects by the power generation industry has
been affected by recent economic forecasts which indicate the possibility that
growth rates in the United States may be less than previously anticipated.
Accordingly, certain of the Company's customers are reviewing their future
construction plans, with a focus on power generation projects that have not
progressed beyond the planning stage, but the Company is not aware of any plans
by its customers to either cancel or terminate any projects in the Company's
backlog. However, in March 2002, the owner of a 510 megawatts simple-cycle power
plant to be located in the state of Tennessee gave Shaw notice of its intent to
suspend the project. Shaw is executing the engineering, procurement and
construction services for this project. It is expected that this project will
restart in early calendar year 2003. Suspension of this project will not have a
material impact on the future operations of the Company.

Although there has been a recent decline in construction awards for new power
plants, and although no assurances can be given, the Company continues to
believe that, on a long-term basis, there is a need for a substantial increase
in power generation capacity in the United States.

Backlog at May 31, 2002 by industry sector is as follows (in millions):

Power Generation $ 2,913
Environmental and Infrastructure 2,552
Process Industries 506
Other Industries 103
--------
$ 6,074
========

Although backlog reflects business that is considered to be firm, cancellations
or scope adjustments may occur. Backlog is adjusted to reflect any known project
cancellations and revised project scope and cost, both upward and downward.

Backlog is not a measure defined in generally accepted accounting principles and
the Company's backlog may not be comparable to backlog of other companies. The
Company cannot provide any assurance that revenues projected in its backlog will
be realized, or if realized, will result in profits.

Liquidity and Capital Resources
- -------------------------------

Net cash provided by operations was approximately $238.9 million for nine months
ended May 31, 2002 compared with $47.1 million of net cash used in operations
for the same period of fiscal 2001. For the nine months ended May 31, 2002, cash
was increased by (i) net income of $67.0 million, (ii) deferred tax expense of
$33.7 million, (iii) depreciation and amortization of $19.5 million, and (iv)
interest accretion and loan fee amortization of $15.4 million. Additionally, net
cash was increased by changes in certain assets and liabilities of $124.5
million, comprised primarily of a decrease in receivables and increases in
advanced billings and billings in excess of costs and estimated earnings on
uncompleted contracts and accrued liabilities. These sources of cash were
partially offset by an increase in excess of costs and estimated earnings in
excess of billings on uncompleted contracts. The net cash realized from the
changes in the assets and liabilities were substantially attributable to the
timing of collection

31

of project revenues and billings and the payment of project costs and general
and administrative expenses. The Company expects positive cash flow from
operations in the fourth quarter of fiscal 2002, but it does not anticipate
sustaining the levels of cash flow received for the nine months ended May 31,
2002.

Additionally, the Company acquired a large number of contracts in the Stone &
Webster and ITG acquisitions with lower than market rate margins due to the
effect of the financial difficulties experienced by Stone & Webster and ITG on
negotiating and executing contracts prior to acquisition. These contracts were
adjusted to their fair value at acquisition date by establishing a gross margin
reserve that reduces cost of sales for contracts as they are completed. Cost of
sales was reduced by approximately $19.6 million and $60.8 million during the
nine months ended May 31, 2002 and 2001, respectively, through the utilization
of this reserve, which is a non-cash component of income. The utilization of
these reserves resulted in a corresponding increase in gross profit during the
nine months ended May 31, 2002 and 2001. See Note 4 of Notes to Condensed
Consolidated Financial Statements.

Net cash used in investing activities was $165.4 million for the first nine
months of fiscal 2002, compared to net cash provided of $89.5 million for the
same period of the prior fiscal year. The Company used cash of approximately
$90.2 million to fund the ITG acquisition in May 2002. During the first nine
months of fiscal 2002, the Company purchased $60.0 million of property and
equipment that included upgrades of corporate information systems and software
programs and additions to the Company's equipment and facilities. The Company
anticipates that property and equipment purchases for the remainder of fiscal
2002 will continue to be higher than historical levels due to the continuation
of upgrading these systems and facilities. Further, the Company provided a net,
secured $1.6 million debtor-in-possession ("DIP") loan to Beneco. Purchases of
new marketable securities exceeded the maturities of marketable securities by
approximately $4.4 million. Additionally, the Company acquired an option, which
expires in 2010, at a cost of approximately $12.2 million, to acquire additional
office building space in the Baton Rouge area. This option was purchased to
assure that the Company will have adequate office facilities to support future
growth of its operations and the needs of its key vendors and customers in the
Baton Rouge area. The Company also received cash distributions of approximately
$2.2 million from its unconsolidated subsidiaries ($2.0 million from
EntergyShaw) and it also received proceeds of approximately $0.7 million from
the sale of assets.

Net cash used in financing activities totaled $32.3 million for the nine months
ended May 31, 2002, compared to $361.9 million of net cash provided in the first
nine months of fiscal 2001. During the nine months ended May 31, 2002, the
Company purchased approximately $27.1 million of treasury stock (1,111,400
shares) in accordance with a plan authorized by the Company's Board of Directors
(see Note 2 of Notes to Condensed Consolidated Financial Statements and the
following paragraph). Additionally, the Company made payments on debt and leases
of approximately $3.8 million and on its foreign revolving credit lines of
approximately $3.3 million. The Company also received approximately $2.2 million
from employees upon the exercise of stock options during the nine months ended
May 31, 2002. During the nine months ended May 31, 2001, the Company received
approximately $490 million from the issuance of LYONs debt, accounting for the
positive cash provided by financing activities.

The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit Facility to $350 million from $300 million and to eliminate the previous
$150 million limit on letters of credit. The Company also has the option to
further increase the Credit Facility under existing terms to $400 million, if
certain conditions are satisfied, including the successful solicitation of
additional lenders or increased participation of existing lenders. The amended
Credit Facility allows the Company to borrow either at interest rates (i) in a
range of 1.50% to 2.25% over the London Interbank Offered Rate ("LIBOR") or (ii)
from the prime rate to 0.75% over the prime rate. The Company selects the
interest rate index and the spread over the index is dependent upon certain
financial ratios of the Company. The Credit Facility is secured by, among other
things, (i) guarantees by the Company's domestic

32

subsidiaries; (ii) a pledge of all of the capital stock in the Company's
domestic subsidiaries and 66% of the capital stock in certain of the Company's
foreign subsidiaries; and (iii) a security interest in all property of the
Company and its domestic subsidiaries (except real estate and equipment). The
Credit Facility also contains restrictive covenants and other restrictions,
which include but are not limited to the maintenance of specified ratios and
minimum capital levels and limits on other borrowings, capital expenditures and
investments. Additionally, the Credit Facility established a $25 million
aggregate limit on the amount of the Company's Treasury Stock purchases and/or
LYONs repurchases to be made subsequent to February 28, 2002 without prior
consent. As of May 31, 2002, the Company was in compliance with these covenants
or had obtained the necessary waivers. At May 31, 2002, letters of credit of
approximately $173.9 million and no revolving credit loans were outstanding
under this facility. The Company's total availability under the Credit Facility
at May 31, 2002 was approximately $176.1 million.

Although the Company had no borrowings outstanding under the Credit Facility as
of May 31, 2002, the Credit Facility is still fully available to the Company. As
of May 31, 2002, the Credit Facility was being used to provide letters of credit
to satisfy various project guarantee requirements. The Company has also
previously used this Credit Facility to provide working capital and to fund
fixed asset purchases and subsidiary acquisitions, including the acquisition of
substantially all of the operating assets of Stone & Webster.

At May 31, 2002, the Company had working capital of approximately $403 million
and unutilized borrowing capacity under its credit facilities of approximately
$176.1 million. Additionally the Company anticipates having positive cash flow
from operations over the next twelve months. The Company's future working
capital requirements will be impacted by such factors as (i) the amount of
increased working capital necessary to support the operations and the settlement
of assumed liabilities of the recently acquired IT Group and Beneco businesses,
(ii) the timing and negotiated payment terms of its projects, and (iii) its
capital expenditures program. Accordingly, it is possible that the Company's
working capital position will decrease during the next twelve months. However,
the Company believes that its current working capital balance is in excess of
its identified working capital needs, (based on its existing operations) and
that it will have sufficient working capital and borrowing capacity to fund its
operations for the next twelve months.

Financial Accounting Standards Board Statements
- -----------------------------------------------

In July 2001, the Financial Accounting Standards Board (FASB) issued two new
accounting standards SFAS No. 141 - "Business Combinations" and SFAS No. 142 -
"Goodwill and Other Intangible Assets." The new standards have significantly
changed prior practices by: (i) terminating the use of the pooling-of-interests
method of accounting for future business combinations, (ii) ceasing goodwill
amortization, and (iii) requiring impairment testing of goodwill based on a fair
value concept. SFAS No. 142 requires that impairment testing of the opening
goodwill balances be performed within nine months from the start of the fiscal
year in which the standard is adopted and that any impairment be written off and
reported as a cumulative effect of a change in accounting principle. It also
requires that another impairment test be performed during the fiscal year of
adoption of the standard and, that impairment tests should be performed at least
annually thereafter, with interim testing required if circumstances warrant.

Effective September 1, 2001, the Company adopted SFAS No. 141 and No. 142.
Therefore, the Company has ceased to amortize goodwill in fiscal 2002. For the
three months and nine months ended May 31, 2001 goodwill amortization was
approximately $4.2 million and $12.1 million, respectively. Additionally, the
Company has determined that its goodwill balances were not impaired as of
September 1, 2001, and accordingly, it has made no adjustments to its goodwill
balances as a result of its adoption of SFAS No. 142.

In June 2001, the FASB issued SFAS No. 143 - "Accounting for Asset Retirement
Obligations." This statement, which is first effective for the Company beginning
in fiscal 2003, requires that the cost of legal obligations

33

associated with the retirement and/or removal of long-lived assets should be
accounted for as additional asset costs and that the net present value of the
retirement/removal costs be recorded as a liability. Asset values (to include
retirement and removal costs) are subject to impairment reviews pursuant to SFAS
No. 144 (see below). The Company is currently reviewing the provisions of SFAS
No. 143 to determine if it will have an effect on the Company.

In August 2001, the FASB also issued SFAS No. 144 - "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes FASB No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." The new statement also supersedes certain aspects of APB 30 -
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," with regard to reporting the effects of a disposal of
a segment of a business and will require expected future operating losses from
discontinued operations to be reported in discontinued operations in the period
incurred rather than as of the measurement date as presently required by APB 30.
Additionally, certain dispositions may now qualify for discontinued operations
treatment. The provisions of the statement are required to be applied for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. Upon adoption, the Company does not expect this statement will have a
material effect on its financial statements.

In May 2002, the FASB also issued SFAS No. 145 - "Recission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" which is effective for fiscal years beginning after May 15, 2002.
This statement, among other matters, provides guidance with respect to the
accounting for gain or loss on capital leases which were modified to become
operating leases. The statement also eliminates the requirement that gains or
losses on the early extinguishment of debt be classified as extraordinary items
and provides guidance when the gain or loss on the early retirement of debt
should or should not be reflected as an extraordinary item. The Company does not
expect this statement to have a material effect on its financial statements when
it becomes effective.

34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk
- ------------------

The Company is exposed to interest rate risk due to changes in interest rates,
primarily in the United States. The Company's policy is to manage interest rates
through the use of a combination of fixed and floating rate debt and fixed rate
short-term investments. The Company currently does not use any derivative
financial instruments to manage its exposure to interest rate risk.

As discussed in Note 7 of Notes to Condensed Consolidated Financial Statements,
on May 1, 2001, the Company issued $790 million (face value) 20-year, 2.25%,
zero-coupon, unsecured, convertible debt for which it received net proceeds of
approximately $490 million. After paying off approximately $67 million of
outstanding debt, the remaining proceeds were invested in short term, AAA debt
instruments and were used for general corporate purposes.

As of May 31, 2002, the Company had a $350 million credit facility ("Credit
Facility") that permits both revolving credit loans and letters of credit. As of
May 31, 2002, the Company had no outstanding revolving credit loans under the
Credit Facility. The interest rate on this credit facility was either 4.75% (if
the prime rate index had been chosen) or approximately 3.34% (if the LIBOR rate
index had been chosen). The Company's total availability under the Credit
Facility at May 31, 2002 was approximately $176.1 million. See Note 7 of Notes
to Condensed Consolidated Financial Statements for further discussion of this
line of credit.

Foreign Currency Risks
- ----------------------

The majority of the Company's transactions are in U.S. dollars; however, certain
of the Company's subsidiaries conduct their operations in various foreign
currencies. Currently, the Company, when considered appropriate, uses hedging
instruments to manage its risks associated with its operating activities when
the Company enters into a transaction in a currency which is different than its
local currency. In these circumstances, the Company will frequently utilize
forward exchange contracts to hedge the anticipated purchases and/or sales. The
Company attempts to minimize its exposure to foreign currency fluctuations by
matching its revenues and expenses in the same currency for its contracts. As of
May 31, 2002, the Company had a minimal number of forward exchange contracts
outstanding that were hedges of certain commitments of foreign subsidiaries. The
exposure from the commitments is not material to the Company's results of
operations or financial position.

35

PART II - OTHER INFORMATION

ITEM 2. - CHANGES IN SECURITIES

Effective May 3, 2002, the Company completed the acquisition of substantially
all of the operating assets and businesses of The IT Group, Inc. ("IT Group")
and certain of its subsidiaries in exchange for cash of approximately
$40,400,000, (net of cash received at closing of approximately $12,100,000),
1,671,336 shares of the Company's common stock, no par value per share (the
"Common Stock") valued at approximately $52,500,000 at closing, assumption by
the Company of the outstanding balance ($50,000,000) of debtor-in-possession
financing it provided to IT Group, and transaction costs of approximately
$10,000,000. These costs where offset by the Company's receipt of approximately
$10,200,000 from a surety for the IT Group to complete certain IT Group
contracts which was reflected as a reduction of the purchase price.

The initial issuance of these shares of Common Stock was not registered under
the Securities Act of 1933, as amended (the "Act"), in reliance upon exemption
for non-public offerings contained in Section 4(2) of the Act and Rule 506
promulgated by the Securities and Exchange Commission thereunder. The IT Group
acquisition was a private, negotiated transaction among IT Group and the
Company.

In connection with the IT Group acquisition, the Company entered into a
registration rights agreement with IT Group providing for certain registration
and other obligations on the part of the Company with respect to these shares of
Common Stock.

ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fiscal quarter ended May 31, 2002, there were no matters submitted by
the Company to a vote of security holders.

ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits

2.1 Composite Asset Purchase Agreement, dated as of January
23, 2002, by and among The Shaw Group Inc., The IT
Group, Inc. and certain subsidiaries of The IT Group,
Inc., including the following amendments: (i) Amendment
No. 1, dated January 24, 2002, to Asset Purchase
Agreement, (ii) Amendment No. 2, dated January 29,
2002, to Asset Purchase Agreement, and (iii) a letter
agreement amending Section 8.04(a)(ii) of the Asset
Purchase Agreement, dated as of April 30, 2002, between
The IT Group, Inc. and The Shaw Group Inc. Incorporated
herein by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 16, 2002. Pursuant to
Item 601(b)(2) of Regulation S-K, the exhibits and
schedules referred to in the Asset Purchase Agreement
are omitted. The Registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule
or exhibit to the Commission upon request.

2.2 Amendment No. 3, dated May 2, 2002, to Asset Purchase
Agreement by and

36

among The Shaw Group Inc., The IT Group, Inc. and
certain subsidiaries of The IT Group, Inc. Incorporated
herein by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 16, 2002. Pursuant to
Item 601(b)(2) of Regulation S-K, the exhibits and
schedules referred to in Amendment No. 3 are omitted.
The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.

2.3 Amendment No. 4, dated May 3, 2002, to Asset Purchase
Agreement by and among The Shaw Group Inc., The IT
Group, Inc. and certain subsidiaries of The IT Group,
Inc. Incorporated herein by reference to Exhibit 2.3 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 16, 2002.

B. Reports on Form 8-K

1. On April 23, 2002, the Company filed a Form 8-K,
attaching a press release dated April 23, 2002,
announcing that the Company had received Court approval
or the acquisition of the assets of The IT Group, Inc.

2. On May 16, 2002, the Company filed a Form 8-K,
disclosing, under Item 2 of Form 8-K, the Company's
purchase of substantially all of the assets of The IT
Group, Inc. and attaching certain agreements relating
to the acquisition.

3. Subsequent to the end of the fiscal quarter covered by
this Form 10-Q, on June 26, 2002, the Company filed a
Form 8-K disclosing, under Item 4 of Form 8-K, the
Company's dismissal of Arthur Andersen LLP as its
independent auditors, and its engagement of Ernst &
Young LLP to serve as its independent auditors for the
fiscal year ending August 31, 2002.

37

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

THE SHAW GROUP INC.

Dated: July 15, 2002 /s/ Robert L. Belk
------------------------------------
Chief Financial Officer
(Duly Authorized Officer)

38

THE SHAW GROUP INC.

EXHIBIT INDEX

Form 10-Q Quarterly Report for the Quarterly Period ended May 31, 2002.

A. Exhibits

2.1 Composite Asset Purchase Agreement, dated as of
January 23, 2002, by and among The Shaw Group Inc.,
The IT Group, Inc. and certain subsidiaries of The IT
Group, Inc., including the following amendments: (i)
Amendment No. 1, dated January 24, 2002, to Asset
Purchase Agreement, (ii) Amendment No. 2, dated
January 29, 2002, to Asset Purchase Agreement, and
(iii) a letter agreement amending Section 8.04(a)(ii)
of the Asset Purchase Agreement, dated as of April
30, 2002, between The IT Group, Inc. and The Shaw
Group Inc. Incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission
on May 16, 2002. Pursuant to Item 601(b)(2) of
Regulation S-K, the exhibits and schedules referred
to in the Asset Purchase Agreement are omitted. The
Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.

2.2 Amendment No. 3, dated May 2, 2002, to Asset Purchase
Agreement by and among The Shaw Group Inc., The IT
Group, Inc. and certain subsidiaries of The IT Group,
Inc. Incorporated herein by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on May
16, 2002. Pursuant to Item 601(b)(2) of Regulation
S-K, the exhibits and schedules referred to in
Amendment No. 3 are omitted. The Registrant hereby
undertakes to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon
request.

2.3 Amendment No. 4, dated May 3, 2002, to Asset Purchase
Agreement by and among The Shaw Group Inc., The IT
Group, Inc. and certain subsidiaries of The IT Group,
Inc. Incorporated herein by reference to Exhibit 2.3
to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on May
16, 2002.

39